Range Resources (RRC) Q2 2019 Earnings Call Transcript
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Range Resources (NYSE: RRC)
Q2 2019 Earnings Call
Jul 26, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Welcome to the Range Resources second-quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements.
After the speaker's remarks, there will be a question-and-answer period. At this time, I would like to turn the call over to Mr. Laith Sando, vice president investor relations at Range Resources. Please go ahead, sir.
Thank you, operator.
Laith Sando -- Vice President Investor Relations
Thank you, operator. Good morning everyone, and thank you for joining Range's second-quarter earnings call. Speakers on today's call are: Jeff Ventura, chief executive officer; Dennis Degner, chief operating officer; and Mark Scucchi, chief financial officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we released on the website.
We also filed our 10-Q with the SEC yesterday, available on our website under the investors tab or you can access it using the SEC's EDGAR system. Please note that we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations to these to the most comparable GAAP figures. For additional information, we've posted supplemental tables on our website to assist in the calculation of EBITDAX cash margins and other non-GAAP measures.
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With that, let me turn the call over to Jeff.
Jeff Ventura -- Chief Executive Officer
Thanks, Laith. And thanks to everyone for joining us on this morning's call. In the first half of 2019, Range delivered on key strategic initiatives: generating organic free cash flow, reducing absolute debt, improving our cost structure, and efficiently executing our 2019 operational plan safely and within budget. I'm proud of the team's efforts day in and day out to make this happen.
The industry is clearly in the middle of challenging times with natural gas and NGL prices lower on seasonal weakness, and energy equity struggling to find investor interest. Against this difficult backdrop, we remain focused on the things that will drive long-term shareholder value, and we remain committed to positioning Range for success through the commodity cycles. In fact, I believe the company is in a better position today than at any time in our past in terms of our ability to not only withstand low prices, but to thrive when the commodity turns in our favor. With Range's stock trading where it is, that might seem counterintuitive, but let me walk you through why I believe that Range is so -- positioned so well currently, coupled with some of the things we're doing to further improve on our competitiveness which Mark and Dennis will elaborate on.
First, we've reduced absolute debt in the last nine months by approximately $1 billion following the recent sale of a 2% overriding royalty on our southwest Pennsylvania acreage. This latest sale improves interest expense by 30 million per year, has a minimal impact to well economics, significantly de-risk the balance sheet, and highlights the substantial value that we have in our assets that is not being reflected in today's equity market. Second, Range has captured almost a half million acres in the core of the Marcellus. This acreage position is largely held by production and has been de-risked by over a thousand Range Marcellus wells and thousands of industry wells that surround our acreage.
This large de-risked blocky position not only allows us flexibility in our capital plans, but it also allows for increasingly efficient operations as we utilize existing pads, optimize infrastructure, drill longer laterals, and effectively source and recycle water. These operational efficiencies are reflecting what we believe are the best drilling and completion costs in the industry. Third, Range is class leading drawing complete costs, and core inventory support a very competitive corporate base decline in low maintenance capital requirements. Range's base decline entering 2019 was below 20% driving a D&C maintenance capital of less than 600 million.
This low sustaining maintenance capital is a differentiator for Range, making Range very durable through the low points of the commodity cycle and providing a solid base for delivering sustainable free cash flow long term. Fourth, Range has fully utilized its transportation and processing capacity providing us flexibility in setting our operational plans from here forward. We're also able to move our products to a variety of markets throughout the U.S. and abroad with projects like the shell cracker and numerous in base and power projects and petchem facilities being contemplated near our core operating area.
We're well positioned to meet that demand when commodity prices warrant that investment. Lastly, we're improving our cost structure by optimizing our transportation and gathering portfolio, rightsizing our G&A and operating efficiently. In fact, we've improved our cost structure approximately 5% since year end 2018, and expect to improve an additional 5% by the end of 2019, putting us well on our way to achieving the improvements we were targeting in our five-year outlook in February. Mark will discuss the improvements that we see across the various cost items in a few minutes.
But to put these unit cost improvements into perspective, every $0.01 improvement to our cost structure provides an uplift of over $8 million annualized cash flow. In other words, the 10% improvement in unit cost we expect between the fourth quarter of 2018 to the fourth quarter of 2019 equates to over 160 million in annual uplift to cash flow or over 10% of our current market cap. These unit cost improvements demonstrate Range's commitment to efficient operations and our resiliency during the challenging commodity environment as these cost reductions provide uplift to cash flow that is agnostic to commodity prices. For all these reasons I just mentioned, I believe Range is in good shape to not only weather the current commodity headwinds but to generate sustainable free cash flow through the cycles.
We've captured a highly contiguous position in the core of the Marcellus. We have filled our infrastructure. We have the ability to reach multiple markets to sell our products. And our cost structure, shallow base decline and peer-leading maintenance capital requirements provide a solid foundation from which we can make capital positions.
While Range is in good shape for a challenging commodity type, we see many reasons to be optimistic for the future of natural gas and NGLs. At a high level, we're producing cleaner, more efficient fuels that are seeing increased demand globally. Demand is growing much faster than for oil. As evidence of this, Range is in discussions with numerous second-wave LNG projects that are looking to secure long-term supplies.
Several of these projects made FID in the second quarter were secured key long-term sales agreements, supporting our expectation that LNG demand reaches 18 bcf per day in the next five years. Looking at where the natural gas market sits today, we're currently seeing record power demand, record LNG exports, record Mexican exports in industrial projects along the Gulf Coast and even in Pennsylvania. This is happening at a time when natural gas producers are slowing activity and storage is at similar levels to last year when looked at on a days of supply basis. We think this sets up a very constructive story that's not being reflected in the forward curve.
At a fundamental level, we can take a look at what price might be required to meet increased -- to meet the increasing demand that's expected over the next decade. Assuming that Permian continues to grow a couple of bcf per day each year, we still see a significant call in Appalachia to supply incremental growth. Looking at Southwest Appalachia today, we find that our peers are not capable of generating free cash flow and grow at the current prices. We do not expect that investors will fund massive, outspends.
And therefore, the pace of growth will slow, perhaps significantly. Before turning it over to Mark and Dennis, I'll just reiterate that I believe Range is well positioned for the current commodity backdrop because we have a great deal of flexibility from setting our capital program given to our advantaged base decline, low maintenance capital, existing infrastructure and improving cost structure. Range also has an unrivaled inventory of high-quality Marcellus locations that provide a good base for not only generating free cash flow at relatively low prices, but to continue for decades into a market that will no doubt see other producers exhausting their core inventories. We believe that as we continue to make progress on improving the balance sheet, Range's competitive advantages and peer-leading inventory will begin to be reflected in the market. We've made good progress, having paid down 1 billion in debt over the last nine months and having generated organic free cash flow over the same time frame, and the entire Range team and board remain committed and focused on further improving our financial position as quickly and prudently as possible.
I'll now turn it over to Dennis to discuss operations.
Dennis Degner -- Chief Operating Officer
Thank you, Jeff. Consistent with our prior call, our operating teams have continued with their strong start to the year with production on track and capital spending in line with our 2019 plan. The second quarter capital spending came in at approximately 25% of the total capital budget; for the first half of the year, spending totaling 55% of the 2019 capital plan, both as projected. This is consistent with our plan outlined earlier in the year with activity front loaded, resulting in a lower capital spend in the second half of the year while generating a significant production increase in Q4.
Production for the second quarter came in at 2.287 bcf equivalent per day, slightly above our production guide for the quarter. This was achieved despite some headwinds associated with unplanned weather and field upsets in the Southwest Pennsylvania liquids gathering and processing systems. Exceptional well performance in both the dry gas and liquids-rich portions of the field for wells turned in line throughout the first and second quarters helped to underpin the production results captured in Q2. The second quarter resulted in us turning in line 18 wells across both divisions.
In Appalachia, we turned to sales 16 wells on four pads focusing on liquids-rich acreage, with the wells evenly split between the wet and super-rich areas of our acreage. In the dry gas portion of the field, we continued to see exceptional performance from wells that were brought online in the first quarter. As an example, one of our recent dry gas pads has produced over 100 million cubic feet per day for more than four months from seven wells from an average lateral length of 13,800 feet. We often talk about the strong gas grades in this area, and this pad is no different, having produced over 15 bcfs of gross gas to date under a constrained environment, keeping a portion of our dry gas gathering fully utilized.
Shifting to the super-rich. In the second quarter, we turned to sales four remaining wells on a seven well pad where sales was initiated at the end of the first quarter. As an example of the productivity we see in our best super-rich locations, this pad continues to produce more than 2,000 barrels per day of condensate after three months of production and is consistent with an offset pad, which has been producing for more than two years and is still capable of producing over 1,000 barrels of condensate per day. Lastly, similar to the prior dry gas example, this pad is falling under constrained conditions and is keeping a part of our liquids-rich gathering system fully utilized.
As we look forward into the second half of 2019, we are scheduled to turn to sales approximately 30 wells in the third quarter, which helps drive Q4 production. But well count only provides one perspective. Looking at this another way, we turned to sales just under 400,000 feet of completed lateral in the first half of 2019 with plans to turn in line over 600,000 feet of completed lateral throughout the third and fourth quarters. After adjusting for recent asset sales, we expect third-quarter production to come in at 2.25 to 2.26 bcf equivalent per day. With our anticipated grant in the fourth quarter, this places our production on track and capital spending at/or better than our 2019 plan.
As the storyline regarding parent-child impacts continues to grow for other basins such as the Permian, we continue to see the reservoir quality of our assets, coupled with our approach to inter-well spacing and completion design, result in positive, consistent results as we continue to develop our acreage and develop -- deliver on our financial objectives. As an example, we recently turned to sales a four well pad that was in the middle of a mature portion of our Southwest PA acreage with adjacent well development and historical production. We are in the early time production phase for these wells, but a few hundred production is right in line with expectations for this area and showing no indications of impacts into existing offset production. This is similar to long-dated results we have from going back to existing pads, which has become common practice for our team.
Now I'd like to go over some of our operational highlights for the quarter. Similar to prior quarters, our drilling team has been able to capture operational efficiency gains by drilling long laterals and returning to existing producing well pads. In the second quarter, the team drilled four of our top 20 longest wells in our Marcellus program history. The average lateral length of these four wells averaged over 16,500 feet per well with a drilling cost per lateral foot that is 22% lower than the year-to-date average cost per lateral foot.
We continue to see the operational and capital efficiency of drilling long laterals by increasing the average lateral length by 7% over the first quarter while reducing the average number of drilling days per lateral to eight days. An important part of capturing these cost reductions and efficiency gains is being repeatable, and that is exactly what our drilling team has been able to accomplish. As of now, we've been able to drill over 20 consecutive horizontal wellbores greater than 15,000 feet without an operational issue, a strong achievement due to the teamwork between our service partners, technical and operational teams. A key part of our program remains our ability to drill from existing pads while generating consistent, normalized well performance as compared to the original wells.
And the second quarter was no exception as we saw half of the wells drilled in Q2 from pads with prior production. Drilling from existing pads is more capital efficient as many of the costs associated with pad construction, road upgrades, facilities and gathering have been previously realized. Range's footprint and inventory of build-producing pads also affords the flexibility to reduce site development time lines associated with design, permitting and construction. We have the ability to return to existing well pads that were drilled with historically shorter laterals and apply current operational techniques, new technology and designs allowing us to produce additional reserves from the same location.
An example of this I'd like to share was in the second quarter where our drilling team returned to an existing pad with two wells drilled during 2012 with a total of 6,500 feet of completed lateral length. On the return trip, the team drilled an additional 52,000 feet of lateral to the pad from the same location. These wells will be completed in the months ahead, and we look forward to sharing the results on a future call. Shifting over to completions.
During the second quarter, the completions team successfully completed Range's two longest horizontals to date with completed lateral lengths of approximately 18,800 feet and 18,700 feet. The team will be finishing completions operations on the remaining wells on this pad during the third quarter with first sale scheduled for early Q4. Long lateral well performance continues to impress as the wells developed, producing history. As of today, we have 10 wells with lateral lengths greater than 15,000 feet, with production varying from less than six months to approximately two years.
As we monitor each well, we see their performance in line or above the published type curves, furthering our confidence for repeatability and long lateral development. Lastly, we have 25 additional laterals greater than 15,000 feet in either the drilling or completion phases, which should provide some exciting results to discuss in the quarters ahead. In addition to long lateral operations, the team has continued to harvest operational and capital efficiencies by extending its water-sharing program. Utilizing other producers' water, or as we call it water sharing, in the second quarter totaled more than 750,000 barrels, which represents a 6% increase over the same time period last year, and a $2 million reduction in completion cost for the quarter.
This translates into real savings for our operations; increase capital efficiency; and overall, it aligns with our corporate values for safe operations while being good stewards to the environment. To continue with this theme, the Range Appalachia operations team was an early adopter in reducing emissions and utilizing field gas to fuel both drilling rigs and frac crews. Over the past several years, this was achieved by having bi-fuel equipment when possible. To continue this effort, the team has taken the next step by successfully completing a three-well pad with an all-electric frac fleet powered by a natural gas turbine from our Southwest PA field gas.
In addition to the reduction of emissions by using clean burning natural gas as the fuel source, the estimated cost reduction associated with the diesel fuel displaced were in over 90 stage completion was approximately $250,000. We will be utilizing this fleet on a second pad this year and evaluating the results for future consideration.To reiterate a point from earlier, it is Range's large contiguous acreage position and ability to move back to existing pads that allows us to take advantage of this type of technology and reduce emissions and capture additional savings in the years ahead. Lastly, for completions, frac efficiencies for the first half of 2019 have increased over 10% versus the same time period a year ago. We're proud of the operating team's continued success and ability to generate a safe and efficient program with a top-tier per foot cost structure.
On the gas marketing side. As Jeff mentioned, we continue to have ongoing discussions with new LNG buyers. Range plans to play a part in this long-term natural gas story with current arrangements to supply 440 million cubic feet per day to five different LNG facilities. On liquids, the Mariner East one pipeline was returned to service in late April, allowing Range to resume exports of 20,000 barrels per day of ethane and 20,000 barrels per day of propane.
Range also made use of the Mariner East two pipeline and rail for transporting additional propane and butane to Marcus Hook for subsequent waterborne exports. The international arms for LPG expanded to the highest levels in five years on strong demand and curtailments in supply from various regions. This resulted in high-capacity utilization at U.S. export terminals and strong premiums on exported barrels relative to domestic market sales.
We expect this dynamic to continue into the third and fourth quarters.Closing out the operations section. The team has delivered on another successful quarter by executing safe operations, by generating repeatable, long lateral, operational results and by capturing strong efficiencies resulting in our best program yet. I'll now turn it over to Mark to discuss the financials.
Mark Scucchi -- Chief Financial Officer
Thank you, Dennis. Despite the second quarter being challenging from a commodity price perspective, Range executed on its operating and financial strategy, sufficiently managed the business, remained free cash flow positive year-to-date and continued efforts to enhance margins through prudent cost management initiatives. In summary, financial results mid-year 2019 are in line with the key principles of our business: first, operate a self-funding cash flow generating business; second, enhance margins and profitability through both price and cost management; and third but equally important, improve the balance sheet through monetization of assets. With operations tracking planned results, Range has generated year-to-date cash flow from operations of $446 million compared to capital spending of $413 million, resulting in free cash flow of 33 million before dividends.
As discussed last year, we made the transition to free cash flow mid-year 2018. We've continued that trend and expect to generate free cash flow for the full-year 2019. Range's ability to generate free cash flow even in a low-price environment is underpinned by its capital efficiency and cost structure. Continuous efforts on optimizing costs have yielded and will continue to yield enhanced profitability and resiliency.
For the second quarter, we delivered on near-term plans with unit costs better than guidance. The quarter-over-quarter improvement of $0.05 per unit and $0.10 per unit compared to the fourth quarter last year are the results of efficiency across the board led by improvements in the gathering, processing and transport line item. To frame this significant improvement, recall that Range guided to a $0.30 improvement over the course of the five-year outlook, whereas in six months, we've achieved one third of that goal. I'll spend a minute walking through each expense line item and our expectations for each.
Gathering and processing and transport expense was $1.45 per Mcfe in the second quarter compared to $1.49 in the first quarter and $1.51 in the fourth quarter of 2018. Last year, we guided to this line item, peaking at the time our last contracted pipeline capacity came on line, which was in the fourth quarter. As planned, full utilization of infrastructure is driving down this cost on a unit basis. As a reminder, this cost consists of infield gathering, processing plant expenses and long-haul transport for natural gas and natural gas liquids.
Long-haul transport is largely a fixed cost with all of our contracted gas capacity online. Infield gathering has both fixed and variable elements, much of the gathering system is fully utilized. And as cost recovery hurdles are met, the fixed rate component will decline over time. On the processing side, this is predominantly structured as a percent of proceeds from NGL sales and will vary with our pre-hedged NGL realizations.
For context, per Mcfe, gathering represents roughly $0.50; transport, roughly $0.50; and processing, around $0.45. The unit cost decline over the past couple of quarters has been driven by modest production growth. Going forward, however, even in a reduced growth scenario, there are reductions in absolute spend that can continue the improving trend in the per unit GP&T costs near, medium and long term. Range's lease operating costs have declined in the absolute and on a per unit of production basis compared to second quarter last year. Range's operating costs are competitive with liquids-producing peers.
And at a more granular level, our cost in the dry gas areas are also competitive with best-in-class dry gas-only producers. This continued strong performance is driven by diligent operations in the field with specific savings related to water handling. Cash G&A expenses declined in the absolute and on a per unit basis. Proactive, thoughtful management of G&A has driven current reductions but also drives expected future savings.
G&A is often thought of as strictly corporate overhead. It actually includes critical investments supporting sound operations, including safety, environmental, regulatory, land administration, IT, as well as more administrative functions. In terms of headcount, when Range's operations included more basins, headcount peaked at over 1,000 employees. Today, Range has approximately 750 extremely hard-working employees.
Just over the last year, there's been a 12% reduction in G&A headcount as a result of asset sales and a reduction in force. Active surveillance of expenses by teams at Range of every element of G&A is expected to generate future cash savings of roughly 10% in absolute dollars on an annualized run rate basis. On the matter of equity compensation expense. As a reminder, it should be noted that even though potential stock grants, specifically performance shares, are expensed, that does not mean shares were issued.
In fact, significant forfeitures have been experienced, which is evident in the modest change in diluted shares outstanding. During the quarter, we closed on acreage sales of $34 million. And as recently announced, we assigned and now closed on the sale of royalty interest for gross proceeds of $600 million. Divestiture proceeds reduced borrowings, and pro forma, the borrowings under the bank line of credit as of June 30 would be 295 million or less than 10% of the borrowing base.
This results in pro forma liquidity under the borrowing base of nearly $2.5 billion. The borrowing base approved in March already contemplated the royalty sales and certain other divestitures. Consequently, there is no change to the borrowing base. Range was in full compliance with the financial covenants in the credit agreement.
And with the asset sales completed, we have further bolstered that position. There are three financial maintenance covenants under the revolving credit agreement. One, a minimum current ratio; two, a minimum cash interest coverage ratio; and three, a minimum ratio of present value of reserves at the same pricing to total debt. Each of these has substantial cushion.
Additional disclosures have been added to the company presentation further explaining these items.Looking at Range's debt maturity profile, our first maturity is mid-2021 with ample liquidity under the revolving line of credit. We effectively have a backstop to help manage maturities. We remain focused on reducing debt, reducing borrowing costs and maintaining a comfortable maturity ladder. On the topic of further balance sheet improvement.
We are currently marketing several additional opportunities. These processes are in various stages. And as we have consistently done in the past, we will announce results, but we will not negotiate against ourselves by establishing a public dollar threshold or time line. Suffice it to say, we have deep inventory projects that we believe we can divest at reasonable values, particularly in comparison to the value of our common equity.
As we look at the progress May to date in 2019, tangible achievements have been delivered against the plan that's laid out early this year. As we look forward to the balance of 2019, we intend to successfully execute on our plan of generating positive free cash flow while we accelerate value creation through inventory management.In summary, we remain focused on converting consistently efficient operations on top-tier acreage into tangible shareholder returns in the form of free cash flow through the application of a disciplined capital allocation framework, coupled with continuous cost management efforts. Back to you, Jeff.
Jeff Ventura -- Chief Executive Officer
Operator, let's open it up for Q&A.
Questions & Answers:
Operator
[Operator instructions] Your first question comes from the line of Kashy Harrison with Simmons Energy.
Kashy Harrison -- Simmons Energy
Good morning, everyone, and thanks for taking my questions. So I know it's early to talk about 2020, but I was wondering if you could share some color on how we should think about capital allocation in a 2 50 environment?
Jeff Ventura -- Chief Executive Officer
At a high level, let me just say, we have a lot of flexibility and very low maintenance capital. But, Mark, let me -- talk a little bit more about our framework and thought process.
Mark Scucchi -- Chief Financial Officer
Sure. I think the key principle that we've laid out in the strategy section upfront in the company presentation is the fact that our capital allocation process starts with free cash flow as a priority. So given Range's peer-leading decline rate, low maintenance capex number and the fact that we have tremendous latitude, nearly every option that is on the table as we try to pass through at the end of 2020, we have no drilling obligations, our infrastructure is fully utilized. So with that, we can be responsive to prices, adjust the capital spending appropriately. And as we gain a little bit greater visibility into 2020 and this year unfolds, we can design the most suitable program, again, being responsive to those gas, NGL prices.
Kashy Harrison -- Simmons Energy
Got you. So spending down year-on-year, got it. And so -- and then the other question I had, there was some commentary earlier in the call on just the -- just a lot of discussion on reducing cash cost to drive sustainable improvements in free cash flow generation moving forward. I was wondering if you could just share some thoughts on consolidation as a whole in the -- your thoughts on consolidation as a whole in the Appalachian Basin and whether there could, in fact, be opportunities to expand free cash flow potential through mergers of equals and reduction in headcount and so forth?
Jeff Ventura -- Chief Executive Officer
I would just say -- start with Range, and then try to hit -- casually answer your question at the end. But yes, I think we're in a good position. We have -- when you look at Range, we have strong inventory, but then you've got to look at the specifics of each company. So we have, I think, one of the lowest corporate decline rates, really, even in the basin, which puts us in a good position, very low maintenance capital.
We're capable of generating free cash flow now versus our peers in the -- we can generate free cash flow and get a little bit of growth. Most of our peers -- or all of our peers in the Southwest part of the basin can't or aren't doing that. Midstream commitments that we have are full. When you look at our cost to drill and complete, they're the lowest in the entire basin.
In fact, a lot of the peers are striving to hit our cost. So -- and we think we can drive those down through technology and probably through a softening of service cost environment, our acreage is HBP and so on. So I think we've got a great path forward. Everybody talks about consolidation in the basin.
And theoretically, some of those things could make sense. But I think we'll stay disciplined in terms of the path that we're on. But from a theoretical point of view, you could argue some of that could make sense.
Kashy Harrison -- Simmons Energy
Got it. That's it for me. Thank you.
Operator
And your next question is from the line of Arun Jayaram with JP Morgan.
Arun Jayaram -- J.P. Morgan -- Analyst
Yeah. Good morning. I wanted to get your thoughts on, if Range decided to move into maintenance mode in 2020, call it, from a 2.4 bcf a day fourth quarter kind of exit rate, what type of capital rig activity tools would you need to keep, call it, that fourth-quarter run rate flat from an overall production basis?
Mark Scucchi -- Chief Financial Officer
Sure. Arun. This is Mark. I'll start with that and then we can each just chime in from an operational perspective and so forth.
So the D&C maintenance capex that we had guided for 2018, fourth quarter from 2017 was $525 million, add in, let's call it, 50 million-or-so in land. If you roll that forward to our exit rate, the number, as you guided to, and think starting from a higher rate and holding that flat, you're probably in the low $600 million range for D&C maintenance capex from fourth-quarter 2019 to fourth-quarter 2020. But keep in mind that since you're holding the high point from 2019 through calendar '20, that's actually generating, call it, mid-single-digit-type growth on an annualized basis. So --
Arun Jayaram -- J.P. Morgan -- Analyst
That's helpful. That's helpful. And any just thoughts on rig activity or tools to do that?
Dennis Degner -- Chief Operating Officer
Yes. This is Dennis. We've taken a strong look throughout the balance of the year at what it would take, especially as we looked at early on the five-year outlook, and the program that we have in place now, one of the focus is how do we maintain our leading operational efficiencies and keep driving down our cost structure, and we feel like we're able to do that with the current rig activity that we have in place in Southwest PA with a couple of rigs and also a frac crew or two. It'll be focused on making sure that we keep water handling, those efficiencies and, as we talked about, the water-sharing value harvested.
So we feel like we -- it's going to be more in line with what we actually had as we finish out the second half of the year.
Arun Jayaram -- J.P. Morgan -- Analyst
Great. Appreciate that commentary. My next question, you guys have guided to a 5% decline in your unit cost structure between the second quarter and the fourth quarter. Assuming you do go to maintenance mode next year, just as a case or scenario, Mark, what are your thoughts on your cost -- cash cost structure in 2020? I do believe some of your Terryville MVCs do roll off next year.
But just directionally, how do you think your per unit cost would trend into 2020?
Mark Scucchi -- Chief Financial Officer
Yes. I think that's a good and a very good question. So the cost trend on a per unit basis and certain contracting absolute spend do decline into next year. As you point out, there is a processing capacity agreement where our MVC rolls off early in 2020 with still a substantial reduction in cost there.
Again, full utilization of the capacity that came online at the end of 2018, further optimization to the extent there's growth in basin, again, further drives down the unit cost on a GP&T basis. I would couple that with the trend line you've seen in absolute reductions on LOE, which has been extremely efficient, in handling water and fund opportunities there. And our G&A savings that we've achieved so far this year, many of the additional initiatives have not materialized because we're waiting for contracts that are not being renewed to roll off over the remaining months of this year. So the benefit for those would really materialize in 2020.
So setting growth aside for a moment, we think that we can continue to achieve meaningful improvements in the unit cost structure. I would also add to that that there's some additional savings on the gathering, processing, specifically transport side, as ME2 comes online next year. Currently some barrels are being railed, which is more expensive. So once ME2 comes online, we'll still be able to reach exports and reduce that absolute spend.
Arun Jayaram -- J.P. Morgan -- Analyst
Great. Thanks a lot.
Operator
Your next question is from the line of Ron Mills with Johnson Rice.
Ron Mills -- Johnson Rice -- Analyst
Good morning. Question maybe for you, Mark, I don't know. On NGL pricing, and you talked -- you have a couple of really good slides in terms of how the macro is improving in terms of days of storage. And if you look at your realizations relative to the Mont Belvieu barrel that you've improved significantly over the past six to nine months, I wonder if you could just provide a little bit more color on your outlook for NGLs.
And how you think that translates into -- in terms of timing and in relative price improvement?
Dennis Degner -- Chief Operating Officer
Yes. Ron, this is Dennis. I'm going to pitch this over to Alan. I think he's going to have some good color on just how we do the downfield vision of NGL pricing and where things are headed.
Alan Engberg -- Vice President Liquids Marketing
Ron, this is Alan Engberg. I head up our liquids business. And I could give you a whole kind of dissertation on NGLs. I'll try to keep it freestyle and just to say that, yes, the second-quarter prices were challenging.
But overall, fundamentals are actually improving as we speak, and we're kind of cautiously optimistic and encouraged based on what we've seen during the second quarter. But if we look at -- take propane as a proxy for the NGL barrel. Going into the second half of this year, we see things -- let's say, we ended the second quarter, in particular in the Northeast, with stocks that were lower year on year. In fact, they were roughly on a four-week moving average basis using EIA pad one data -- at the end of the second quarter, we're 7% under last year.
And as of the most recent EIA closing, again, on a four-week moving average basis, we're roughly 8% under last year. So the Northeast has actually tightened. If we take a broader look at the overall U.S. fundamentals, they're also improving.
In fact, we started off from a high level at the end of the first quarter when we started to build the season, probably 25% higher than where we were a year ago. But during the second quarter, especially in May and June, we start to work that off. The -- June, in particular, we saw inventory has actually decreased by roughly five million barrels year on year. So for those reasons, we're going into the third quarter now with fundamentals that are actually starting to improve.
In particular, we're looking at -- in addition to export capacity that's going to be coming up during the third quarter, as enterprises turn them over, they're adding 175,000 barrels per day. And that's going to free up the U.S.' ability to move more product. That we're seeing -- again, from the tightening fundamental trend that we've been seeing of late, we're expecting that we're going to get into start of winter with inventories on a day supply basis that are going to be lower than last year. We have, additionally, new export capacity coming on during 2020 that is significant.
It's like 750,000 barrels of new export capacity, which is way in excess of what supply growth is going to be. So overall, for all those reasons, we think the picture looks pretty good. Now some people might ask, can the rest of the world absorb all the exports that the U.S. is going to be sending out? And for that, if you -- you said you'd looked at the slide deck.
If you look at, I think, Slide No. 39, if you don't mind, I'd be happy to walk you through that. But in Slide 39, for global LPG S&D, we start with demand of around 9.6 million barrels at the end of 2018. Now the last five years, we've had growth of roughly 5% globally for LPG. To be conservative, we're going to say growth over the next five years will be 3%.
If we apply that to the base demand, which is res com, kind of home heating, industrial, auto gas, we get growth over the next five years of around 850,000 barrels per day. Then we take a look at the chemical sector. And we won't apply 3% on that. We'll actually be stricter, I'll say.
Let's just look at projects that are under construction globally and projects that are close to FID. So they've got their financing in place. That adds another 700,000 barrels per day of demand, so it's 350,000 for PDHs and 350,000 a day for ethylene plants that will consume LPG. So total demand growth is about 1.6 million barrels.
Then if we look at the supply side, the EIA's global outlook came up with supply growth outside of the U.S. over the next five years for LPG of 350,000 barrels per day. That's only 22% of that increase in demand. So that means that the rest of it is up to the U.S.
to fill, and that's a call on the U.S. of 1.2 million barrels per day. Now at current strip pricing, one of the consultants that we respect, we looked at their numbers and their forecast is growth of only 750,000 barrels per day. So do the math on that and end up with a global short of around 450,000 barrels per day.
Now that's just one scenario, but it's a decent scenario that says number one, the world does want the rest -- the U.S.' exports. The U.S. needs more export capacity, and you can argue, needs more supply if this scenario plays out. Does that answer your question?
Operator
He is out of queue now. We are nearing the end of today's conference call, and we will go to David Deckelbaum of Cowen for our final question.
David Deckelbaum -- Cowen and Company -- Analyst
Thanks for putting me in at the end guys. Appreciate the time, thank you. I just have two questions. One, congratulations on the recent overriding royalty interest sale.
That took about half a turn out of your leverage. What other meaningful opportunities have you identified? And can we expect similar types of impacts within the efforts going forward? And would you be willing or do you have the capacity to do similar transactions now?
Mark Scucchi -- Chief Financial Officer
Yes. This is Mark. I'll start off. And so given the sheer depth of inventory of projects, the scale of our footprint, the time horizon we're talking about in terms of developing that, there are extremely high-quality projects that we believe can find a good bid in the market today.
We are focused on, as I mentioned during my scripted portion, accelerating the value of some of that through the divestiture processes. We have a number of processes under way. I'm reluctant to get into specifics on any one. But suffice it to say, we are actively working multiple, meaningful projects, and we eagerly look forward to announcing those.
But we are keenly interested in monetizing some of that, materially improving and altering the capital structure and capturing some of the value from the depth of this inventory.
David Deckelbaum -- Cowen and Company -- Analyst
Would that include other potential overriding royalty interest packages?
Mark Scucchi -- Chief Financial Officer
I would say we've got a very open mind. I mean you could see the value in the bid for those that we've achieved in three transactions, raising $900 million. So there's clearly a bid for that type of asset, so we would keep that in mind.
David Deckelbaum -- Cowen and Company -- Analyst
OK. I guess I just recalled the last time you guys were asked about this, I think you had said that you would be willing to do up to 2% this year. I guess can you remind us why that was the upper limit and what might exist beyond that?
Mark Scucchi -- Chief Financial Officer
As we laid out the guidelines, what we were starting with was roughly an 83% NRI. And as guidepost, we said that we think that being around 80% would still be an advantageous position for Range to be in relative to average NRIs of peers. And it's clearly not a material detriment to the returns of the wells. So that's not a hard and fast number.
It was a guidepost that we were indicating that even after divestiture of a few points, we would still be in a very strong position. And I think that sitting at 80% today, I think we find ourselves in still a very good position.
David Deckelbaum -- Cowen and Company -- Analyst
Yes. I'd agree. My last question, just if you might, could you give us any specific dollar color on the savings you'll experience next year and the following year from some of the NVCs rolling off, I guess, just as a total dollar amount to the company?
Mark Scucchi -- Chief Financial Officer
What I'll do is actually point you to the old disclosures on the North Louisiana assets. If -- you can look back at the NVC processing committed, it's material to Range's overall cost but -- in terms of the individual contracts. But I'll point you back to the last 10-K that oil would have filed. They broke down the individual contracts, the capacity and the time line, and you can calculate what the roll-off is.
Operator
Thank you. And this does conclude today's question-and-answer session. I would like to turn the call back over to Mr. Ventura for his closing remarks.
Jeff Ventura -- Chief Executive Officer
I just want to thank everybody for participating on today's call and feel free to follow up with our IR team with additional questions. Thank you.
Operator
[Operator signoff]
Duration: 50 minutes
Call participants:
Laith Sando -- Vice President Investor Relations
Jeff Ventura -- Chief Executive Officer
Dennis Degner -- Chief Operating Officer
Mark Scucchi -- Chief Financial Officer
Kashy Harrison -- Simmons Energy
Arun Jayaram -- J.P. Morgan -- Analyst
Ron Mills -- Johnson Rice -- Analyst
Alan Engberg -- Vice President Liquids Marketing
David Deckelbaum -- Cowen and Company -- Analyst
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